CFA Practice Question

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CFA Practice Question

Which statement(s) is (are) true regarding a senior-subordinated structure?

I. The subordinated tranches provide credit protection for the senior tranche.
II. Once the deal is closed, the percentage of the senior tranche changes when the underlying assets are subject to prepayments.
Correct Answer: I and II

User Contributed Comments 5

User Comment
rhardin What does II mean? Thanks.
jingie I think prepayments are applied to subs first so they are retired first, thus the proportion of senior to sub increases.
joywind I think what II trying to say is that once there is only prepayment distributed, the proportion of both tranches will change under senior-subordinated structure, since the prepayment amount will be assigned to senior tranche first instead of to both tranches proportionally.
joywind correct the post before: when the prepayment is changing, only when prepayment is slower than expected, senior will receive first, otherwise, the subordinate receive the surplus than expected. But in either way, it is not going to be distributed to both sides proportionally, so the percentage of either side will change.
joywind I am getting myself some trouble here! sorry guys... ignore my second comment there... I think the first post from me should be right.
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